EDUCATIONAL DEVELOPMENT CORP - Annual Report: 2016 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-K

 

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(Mark One)

 

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended February 29, 2016

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from               to             .

Commission file number: 000-04957

(Exact name of registrant as specified in its charter)

 

Delaware	73-0750007
(State or other jurisdiction of  incorporation or organization)	(I.R.S. Employer Identification No.)
5402 South 122nd East Avenue, Tulsa, Oklahoma	74146
(Address of principal executive offices)	(Zip Code)

 

Registrant’s telephone number, including area code (918) 622-4522

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.20 par value

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 Yes ☒                                                        No ☐
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

The aggregate market value of the outstanding shares of common stock held by non-affiliates of the registrant at the price at which the common stock was last sold on August 31, 2015, on the NASDAQ Stock Market, LLC was $24,498,500.

As of May 26, 2016, 4,069,669 shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for fiscal year 2016 relating to our Annual Meeting of Shareholders to be held on July 19, 2016 are incorporated by reference into Part III of this Report on Form 10-K.

 

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS		4
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	5
Item 2.	Properties	5
Item 3.	Legal Proceedings	5
Item 4.	Mine Safety Disclosures	5
PART II
Item 5.	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	6
Item 6.	Selected Financial Data	6
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	6
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 8.	Financial Statements and Supplementary Data	15
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	15
Item 9A.	Controls and Procedures	15
Item 9B.	Other Information	15
PART III
Item 10.	Directors and Executive Officers of the Registrant	16
Item 11.	Executive Compensation	16
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	16
Item 13.	Certain Relationships and Related Transactions	16
Item 14.	Principal Accountant’s Fees and Services	16
PART IV
Item 15.	Exhibits and Financial Statement Schedules	17

 

This report contains statements that are forward-looking.  You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document.  These forward-looking statements are not historical facts but are expectations or projections based on certain assumptions and analyses made by our senior management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors.  As used in this Annual Report on Form 10-K, the terms “EDC,” “we,” “our” or “us” mean Educational Development Corporation, a Delaware corporation, unless the context indicates otherwise.

Our ability to achieve such results is subject to certain risks and uncertainties which are not currently known to us.  We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made.  We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report.

(a)  General Development of Business

Educational Development Corporation (“EDC”) is the exclusive United States trade publisher of the line of educational children’s books produced in the United Kingdom by Usborne Publishing Limited (“Usborne”).  We were incorporated on August 23, 1965, in the State of Delaware. Our fiscal years end on February 29(28).

We also own Kane Miller Book Publishers; award-winning publishers of international children’s books.

Our company motto is “The future of our world depends on the education of our children.  EDC delivers educational excellence one book at a time.  We provide economic opportunity while fostering strong family values.  We touch the lives of children for a lifetime.”

(b)  Financial Information about Industry Segments

While selling children’s books is our only line of business, we sell them through two divisions:

·

Home Business Division (“Usborne Books & More” or “UBAM”) - This division distributes books nationwide through independent consultants, who hold book showings in individual homes, through social media, book fairs, direct sales and internet sales.  The UBAM consultants also distribute these titles to school and public libraries.

·	Publishing Division (“EDC Publishing”) – This division markets books to bookstores (including major national chains), toy stores, specialty stores, museums and other retail outlets throughout the country.

Percent Net Revenues by Division

		2016				2015
UBAM			83	%			65	%
Publishing			17	%			35	%
Total net revenues			100	%			100	%

 (c)  Narrative Description of Business

Products

 

As the sole United States trade publisher of the Usborne line of books, we offer over 2,000 different titles.  Many are interactive in nature, including our Touchy-Feely board books, activity and flashcards, adventure and search books, art books, sticker books and foreign language books.  The majority of the titles published by Kane Miller Book Publishers originally were published in other countries in their native languages.

We have a broad line of ‘internet-linked’ books which allow readers to expand their educational experience by referring them to relevant non-Usborne websites.  Our books include science and math titles, as well as chapter books and novels.  We continually introduce new titles across all lines of our products.

UBAM markets the books through commissioned consultants using a combination of direct sales, home parties, book fairs and the internet.  The division had approximately 19,600 consultants in 50 states at February 29, 2016.

EDC Publishing markets through commissioned trade representatives who call on book, toy, and specialty stores along with other retail outlets.  We also do in-house marketing by telephone to these customers and potential customers.  This division markets to approximately 5,000 book, toy and specialty stores.  Significant orders, totaling 22% of the Publishing division’s net sales, have been received from major book chains.

Key Customers

No customer represents more than 10% of our net sales.

Seasonality

Sales for both divisions are greatest during the fall due to the holiday season.

Competition

While we have the exclusive U.S. rights to sell Usborne Books, we face competition for UBAM from several other larger direct selling companies - for sales and consultants.  Our school and library market faces competition from Scholastic Books for the book fair market.

EDC Publishing faces competition from large U.S. and international publishing companies.

Employees

As of April 1, 2016, 150 full-time employees worked at our Tulsa and San Diego facilities; almost 60% of those are in the distribution warehouse.  We believe our relations with our employees are good.

Company Reports

Our annual and quarterly reports (Forms 10-K and 10-Q), current Form 8-K reports and amendments to those reports filed with the SEC are available for download from the Investor Relations portion of our website at www.edcpub.com.

Item 1A.  RISK FACTORS

We are a smaller reporting company and are not required to provide this information.

Item 1B.  UNRESOLVED STAFF COMMENTS

None

Item 2.     PROPERTIES

We are located at 5402 S 122^nd E Ave, Tulsa, Oklahoma.  This facility is owned by us and contains approximately 400,000 square feet of office and warehouse space, of which 219,000 is utilized by us and  181,000 is occupied by a third-party tenant.  All product distributions are made from this 170,000 square foot warehouse using multiple flow-rack systems, known as “the lines,” to expedite order fulfillment, packaging, and shipment.  A facility located at 10302 E. 55th Pl., Tulsa, Oklahoma is also owned by us and contains approximately 95,000 square feet of warehouse space which is used to store our overflow inventory, along with approximately 10,000 square feet of office space that is currently vacant.  We also lease a small office in San Diego, California which houses Kane Miller Book Publishers.  We believe that our operating facilities meet both present and future capacity needs.

Item 3.     LEGAL PROCEEDINGS

We are not a party to any material pending legal proceedings.

Item 4.     MINE SAFETY DISCLOSURES

None

Item 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of EDC is traded on NASDAQ (symbol--EDUC).  The high and low quarterly common stock quotations for fiscal years 2016 and 2015, as reported by the NASDAQ, were as follows:

 

		2016								2015
Period		High				Low				High				Low
1st Qtr			5.00				3.97				3.92				3.57
2nd Qtr			6.05				4.58				4.95				3.71
3rd Qtr			14.27				6.30				4.88				4.04
4th Qtr			16.97				8.98				5.80				4.12

The number of shareholders of record of EDC’s common stock at February 29, 2016 was 576.

During fiscal year 2016, we paid quarterly dividends totaling $0.35 per share as follows:  $0.08 per share dividend on March 20, 2015, $0.09 per share dividend on June 19, 2015, $0.09 per share dividend on September 18, 2015, and $0.09 per share dividend on December 18, 2015.  An additional $0.09 per share dividend was declared on February 26, 2016 and was paid during fiscal year 2017 on March 18, 2016.

We had no repurchases of our common stock during the fourth quarter of fiscal year 2016 and a maximum number of shares that may be repurchased totaling 303,152.

Period		Total # of Shares Purchased				Average Price Paid per Share				Total # of Shares Purchased as Part of Publicly Announced Plan (1)				Maximum # of Shares that May be Repurchased under the Plan
															303152
December 1 - 31, 2015			-				-				-				303,152
January 1 - 31, 2016			-				-				-				303,152
February 1 - 29, 2016			-				-				-				303,152
Total			-			$	-				-

(1)	In April 2008 the Board of Directors authorized us to purchase up to 500,000 additional shares of our common stock under a plan initiated in 1998.  This plan has no expiration date.

Item 6.     SELECTED FINANCIAL DATA

 

We are a smaller reporting company and are not required to provide this information.

Management’s discussion and analysis contains statements that are forward-looking and include numerous risks which you should carefully consider.  Additional risks and uncertainties may also materially and adversely affect our business.  You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document.  Our fiscal years end on February 29(28).

Management Summary

Educational Development Corporation is the sole distributor in the United States of the Usborne line of children’s books and is the owner of Kane Miller Book Publishers.  We operate two separate divisions, EDC Publishing and Usborne Books & More (“UBAM”), to sell these books.  Our corporate headquarters, including the distribution facility for both divisions, is located in Tulsa, Oklahoma.

These two divisions each have their own customer base.  EDC Publishing markets its products on a wholesale basis to various retail accounts.  UBAM markets its products to individual consumers as well as to school and public libraries through direct-selling consultants.

Publishing Division

EDC Publishing operates in a market that is highly competitive, with a large number of companies engaged in the selling of books.  The Publishing division’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.  To reach these markets, the Publishing division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned inside sales group located in our headquarters.  The Vice President of the Publishing division manages sales to the national chain customers.

Publishing Division Net Revenues by Market Type
		FY 2016				FY 2015
National chain stores			22	%			26	%
All other			78	%			74	%
Total net revenues			100	%			100	%

EDC Publishing uses a variety of methods to attract potential new customers and maintain current customers.  Company personnel attend many of the national trade shows held by the book selling industry each year, allowing us to make contact with potential buyers who may be unfamiliar with our books.  We actively target the national chains through joint promotional efforts and institutional advertising in trade publications.  The Publishing division also participates with certain customers in a cooperative advertising allowance program, under which we pay back up to 2% of the net sales to that customer.  Our products are then featured in promotions, such as catalogs, offered by the vendor.  We may also acquire, for a fee, an end cap position in a bookstore (our products are placed on the end of a shelf), which in the publishing industry is considered an advantageous location in the bookstore.

EDC Publishing’s in-house telesales group targets the smaller independent book and gift store market.  Our semi-annual, full-color, 160-page catalogs, are mailed to over 5,000 customers and potential customers.  We also offer two display racks to assist stores in displaying our products.

Net Revenues for Publishing Division
		FY 2016				FY 2015
Net Revenues		$	10,831,400			$	11,532,500

Publishing division’s net revenues decreased $701,100 in fiscal year 2016 from fiscal year 2015, or 6.1%.  Net revenues were up 5.0% for smaller retail stores and down 14.4% for national chain stores.

Usborne Books & More (“UBAM”) Division

UBAM is a multi-level direct selling organization that markets its products through independent sales representatives (“consultants”) located throughout the United States.  The customer base of UBAM consists of individual purchasers, as well as school and public libraries.  Revenues are generated through internet sales, home shows, book fairs and contracts with school and public libraries.  This past fiscal year continued a significant shift toward online home shows via social media outlets, such as Facebook.

An important factor in the continued growth of the UBAM division is the addition of new sales consultants and the retention of existing consultants.  Current active consultants (defined as those with sales during the past six months) recruit new sales consultants.  UBAM makes it easy to recruit by providing signing kits for which new consultants can earn partial or full reimbursement based on established sales criteria.  UBAM provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.

Consultants During Year
		FY 2016				FY 2015
New Sales Representatives			18,000				6,500
Active Sales Representatives End of Fiscal Year			19,600				7,800

The UBAM division presently has six levels of sales representatives:

 

·	Consultants

·	Team Leaders

·	Senior Team Leaders

·	Executive Team Leaders

·	Senior Executive Team Leaders

·

Directors

Once team leaders reach certain established criteria, they become senior team leaders and are eligible to earn promotion bonuses on their downline groups.  Once senior team leaders reach certain established criteria, they become executive team leaders, senior executive team leaders or directors.  Executive team leaders and higher may receive an additional monthly override payment based upon the sales of their downline groups.

During fiscal year 2016, a significant shift, which began during the prior fiscal year, continued in our home party sales model from our traditional, in-person home parties.  With the increased use of social media, online venues such as Facebook, have become a popular outlet for these events.  This allows customers to ‘attend’ online from any location.  While we had marked growth in both home party net revenues, after commissions, and in internet net revenues, after commissions, this shift is most evident in the proportion of internet and home show orders to the total net revenues, after commissions.

Net Revenues, after Commissions, for UBAM Division
		FY 2016				FY 2015
Net Revenues		$	52,786,900			$	21,015,800
Less commissions			(17,710,800	)			(6,491,500	)
Net Revenues, after commissions		$	35,076,100			$	14,524,300

 

Percent of Net Revenues, after Commissions, by UBAM Marketing Program
		FY 2016				FY 2015
Internet			54	%			23	%
School & Library			20	%			41	%
Home Shows			12	%			25	%
Fund Raisers			2	%			2	%
Transportation Revenues			12	%			9	%
Totals			100	%			100	%

Number of Orders by UBAM Marketing Program
		FY 2016				FY 2015
Internet			561,000				91,700
School & Library			21,400				14,000
Home Shows			98,800				30,200
Fund Raisers			1,300				1,000
			682,500				136,900

This increase in net revenues, after commissions, resulted from increases in the following:

·	598% in internet sales

·	50% in school and library sales

·	42% in home party sales

·	135% in fundraiser sales

The increase in net revenues, after commissions, is greatly attributed to a 151% increase in the number of active consultants  at the end of fiscal year 2016.

The increase in internet net revenues, after commissions, is attributed to 512% more orders placed during the period, along with a 15% increase in average order size.  Customers order via the consultants’ UBAM-hosted web sites, which have been customized to their own preferences.  Orders are processed through a shopping cart and the consultant receives sales credit and commission on the sales.  Much of the increase in internet sales resulted from the use of social media to host virtual parties, frequently referred to as “Facebook Parties” and from the increase in the number of sales consultants.

The school and library marketing program increase is attributed to a 53% increase in the number of orders, offset by the average order size decreased of 2% over the prior fiscal year.   Much of this change is a result of the increase in the number of sales consultants.

School and library sales are made by consultants who have received additional, specialized training which allows them to sell to schools and libraries.  The UBAM consultant is the only source that a library or school has for most of our titles.  They are not available through school supply distribution companies.

The increase in home party sales, including the discontinued category of “direct sales”, after commissions, is attributed to a 227% increase in the total number of orders, offset by a 56% decrease in average order size.  Much of this change is a result of the increase in the number of sales consultants.  Consultants contact individuals (“hostesses”) to hold book shows in their homes.  The consultant assists the hostess in setting up the details for the show and makes a presentation at the show and takes orders for the books.  The hostess earns free books based upon the total sales at the show, including online orders. These online orders are reported as internet sales, which has resulted in smaller average home show order sizes.  Customer specials are available for customers when they order a selected amount.  Additionally, home shows provide an excellent opportunity for recruiting new consultants.

Our fund-raising program, Cards for a Cause, increased 135% in sales, after commissions, over the prior year.  This resulted from a 30% increase in the number of orders and a 71% increase in the average size of these orders over the prior fiscal year.  Organizations sell variety boxes of greeting-type cards and keep a portion of the proceeds to help support themselves and their related causes.

The cost of free books provided under the various UBAM marketing programs is recorded as operating and selling expense in the statements of earnings.

(1-2) Liquidity and Capital Resources

During fiscal year 2016, we experienced positive cash flow from our operations of $6,650,600.  Cash flow resulted from the following:

·	an increase in accounts payable, accrued salaries and commissions, and other current liabilities of $6,837,000,

·	an increase in deferred revenue of $2,925,200

·	net earnings of $2,119,300,

·	the provision for doubtful accounts and sales returns of $1,239,600,

·	an increase in net income tax payable/receivable of $739,500, and

·	depreciation expense of $274,500.

Offset by:

·	an increase in inventories of $6,048,600,

·	an increase in prepaid expenses and other assets of $672,500,

·	an increase in accounts receivable of $676,200,

·	provision for inventory valuation allowance of $68,100, and

·	deferred income tax benefit of $19,100.

The significant increase in accounts payable, accrued salaries and commissions, and other current liabilities is primarily a result of the current payments owed to our suppliers for our increased inventory stock required to sustain our sales increase.

The increase in deferred revenue is primarily a result of orders received for the UBAM division, but not shipped by the end of fiscal year 2016.

Our capital expenditures included:

·	Purchase of new facility of $23,213,600

·	Warehouse rack system for new facility of $1,074,000

·	Additional investment in accounting and UBAM software systems of $410,400

·	Warehouse equipment of $95,400

·	Other improvements to new facility of $94,800

Cash provided by financing activities was $19,060,800, which was primarily due to $18,400,000 in long-term debt related to the purchase of our new facility, offset by long-term debt payments of $97,200.  Also, $4,881,800 in borrowings were provided under our revolving credit agreement, offset by $2,950,000 in payments against this agreement.  Additionally, $202,500 was provided from the sale of treasury stock, offset by $1,600 paid to acquire treasury stock.  Cash was also used for dividend payments of $1,374,700.

In September 2002, the Board of Directors authorized a minimum annual cash dividend of 20% of net earnings.  In fiscal years 2016 and 2015, we declared dividends equal to 67% and 149%, respectively, of net income after taxes.

Our Board of Directors adopted a stock repurchase plan in which we may purchase up to an additional 500,000 shares as market conditions warrant.  When management believes the stock is undervalued and when stock becomes available at an attractive price, we can utilize free cash flow to repurchase shares.  Management believes this enhances the value to the remaining shareholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.

(3) Results of Operations

Earnings as a Percent of Net Revenues
		FY 2016				FY 2015
Net revenues			100.0	%			100.0	%
Cost of sales			32.2	%			39.2	%
Gross margin			67.8	%			60.8	%
Operating expenses:
Operating and selling			30.5	%			29.2	%
Sales commissions			28.4	%			21.0	%
General and administrative			3.7	%			6.3	%
Total operating expenses			62.6	%			56.5	%
Other income, net			0.4	%			0.0	%
Earnings before income taxes			5.6	%			4.3	%
Income taxes			2.3	%			1.7	%
Net earnings			3.3	%			2.6	%

Fiscal Year 2016 Compared with Fiscal Year 2015

The following presents an overview of our results of operations for years ended February 29, 2016 and February 28, 2015.  We had earnings before income taxes of $3,545,900 for fiscal year 2016 compared with $1,402,500 for fiscal year 2015.

 

 Revenues     

 

		FY 2016				FY 2015				$ Change
Gross sales		$	80,319,400			$	48,345,400			$	31,974,000
Less discounts & allowances			(22,061,500	)			(17,273,100	)			(4,788,400	)
Transportation revenue			5,360,400				1,476,000				3,884,400
Net revenues		$	63,618,300			$	32,548,300			$	31,070,000

UBAM’s gross sales increased 138.0% or $33,274,800 during fiscal year 2016 to $57,385,300 when compared with fiscal year 2015.  This increase is attributable to a 151% increase in the number of independent sales consultants, with resulting increases in all types of sales, including internet, school and library/book fair, home parties, and fund raisers.  The overall number of orders was up 398% due to increases in internet, home show, school and library, and fund raiser orders.  Average sales per order for this division were down 48%, primarily due to a shift from larger home party orders to multiple individual online orders per internet-based party.

EDC Publishing’s gross sales decreased 5.4% or $1,300,800 during fiscal year 2016 when compared with fiscal year 2015.  Sales increased by 5.0% to smaller retail stores and decreased by 14.4% to national chain stores.

UBAM’s discounts and allowances were $9,927,900 in fiscal year 2016 and $4,533,600 in fiscal year 2015.  Most sales by UBAM are at retail.  As a part of UBAM’s marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year.  The discounts and allowances in the UBAM division will vary from year to year depending upon the marketing programs in place during any given year.  UBAM’s discounts and allowances were 17.3% of UBAM’s gross sales in fiscal year 2016 and 18.8% in fiscal year 2015.

EDC Publishing’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM division due to the different customer markets that each division targets.  The Publishing division’s discounts and allowances were $12,133,600 in fiscal year 2016 and $12,739,500 in fiscal year 2015.  To be competitive with other wholesale book distributors, EDC Publishing sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order.  EDC Publishing’s discounts and allowances were 52.9% of their gross sales in fiscal year 2016 and 52.6% in fiscal year 2015.

Transportation revenues increased $3,884,400 or 263.2% in fiscal year 2016, due primarily to the increase in UBAM gross sales during the year and the shift in sales to more, smaller internet-based orders, which each are subject to a flat minimum shipping charge.  Also, we realized the benefit of a full year with a 20% increase in the minimum shipping charge made during fiscal year 2015.

		FY 2016				FY 2015				$ Change
Cost of sales		$	20,494,200			$	12,763,900			$	7,730,300
Operating and selling			19,419,400				9,515,400				9,904,000
Sales commissions			18,062,800				6,842,700				11,220,100
General and administrative			2,328,500				2,039,900				288,600
Total		$	60,304,900			$	31,161,900			$	29,143,000

Operating and selling expenses include purchasing and receiving, inspection, warehousing, and other costs of our distribution network.  These costs totaled $2,865,700 in fiscal year 2016 and $1,259,500 in fiscal year 2015.  In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing and UBAM divisions, along with the order entry and customer service functions.  Operating and selling expenses as a percentage of gross sales were 24.2% for fiscal year 2016 and 19.7% for fiscal year 2015.

General and administrative expenses include the executive department, accounting department, information services department, general office management and building facilities management.  General and administrative expenses as a percentage of gross sales were 2.9% for fiscal year 2016 and 4.2% for fiscal year 2015.

Contractual Obligations

We are a smaller reporting company and are not required to provide this information.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may materially differ from these estimates under different assumptions or conditions.  Historically, however, actual results have not differed materially from those determined using required estimates.  Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report.  However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.

Stock-Based Compensation

We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense.

Revenue Recognition

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point.  UBAM’s sales are paid at the time the product is ordered.  These sales accounted for 83% and 65% of net revenues in fiscal years 2016 and 2015, respectively.

Estimated allowances for sales returns are recorded as sales are recognized and recorded.  Management uses a moving average calculation to estimate the allowance for sales returns.   We are not responsible for product damaged in transit.  Damaged returns are primarily from the retail stores.  The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.  Management has estimated and included a reserve for sales returns of $100,000 for the years ended February 29, 2016 and February 28, 2015.

Allowance for Doubtful Accounts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments.  An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends.  Management has estimated an allowance for doubtful accounts of $401,900 and $234,500 as of February 29, 2016 and February 28, 2015, respectively.

Inventory

Management continually estimates and calculates the amount of noncurrent inventory.  The inventory arises due to occasional purchases of book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of our primary supplier.  Noncurrent inventory was estimated by management using the current year turnover ratio by title.  All inventory in excess of 2 ½ years of anticipated sales was classified as noncurrent inventory.  Noncurrent inventory balances prior to valuation allowances were $469,000 and $718,900 at February 29, 2016 and February 28, 2015, respectively.

Inventories are presented net of a valuation allowance.  Management has estimated and included a valuation allowance for both current and noncurrent inventory.  This allowance is based on management’s identification of slow moving inventory on hand.  Management has estimated a valuation allowance for both current and noncurrent inventory of $325,000 and $393,100 as of February 29, 2016 and 2015, respectively.

Our product line contains approximately 2,000 titles, each with different rates of sale, depending upon the nature and popularity of the title.  Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future.  Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a three to four-month lead-time to have a title reprinted and delivered to us.

Our principal supplier, based in England, generally requires a minimum reorder of 6,500 or more of a title in order to get a solo print run.  Smaller orders would require a shared print run with the supplier’s other customers, which can result in more lengthy delays to receive the ordered title.  Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series.  We then place the initial order or re-order based upon this analysis.

These factors and historical analysis have led Management to determine that 2 ½ years represents a reasonable estimate of the normal operating cycle for our products.

New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting.  We have reviewed the recently issued pronouncements and concluded that the following recently issued accounting standards apply to us.

In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” which provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures.  The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which means the first quarter of our fiscal year 2019.  We are currently reviewing the ASU and assessing the potential impact on our financial statements.

In August 2015, FASB issued ASU No. 2015-15 “Interest—Imputation of Interest,” which modifies the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.  These changes allow an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  The changes are effective for financial statements issued for annual periods beginning after December 15, 2015, and interim periods within those annual periods, which means the first quarter of our fiscal year 2017.We are currently reviewing the ASU and assessing the potential impact on our financial statements.

In November 2015, FASB issued ASU No. 2015-17, which is intended to improve how deferred taxes are classified on organizations’ balance sheets by eliminating the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.  Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent.  The changes are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which means the first quarter of our fiscal year 2018.  We anticipate this ASU having minimal impact on our financial statements.

In February 2016, FASB issued ASU No. 2016-02, “Leases,” which is intended to establish a comprehensive new lease accounting model.  The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset.  The new standard is effective for interim and annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020.  The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements.  We are currently reviewing the ASU and evaluating the potential impact on our financial statements.

In March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The new standard is effective for interim and annual periods beginning after December 15, 2016, which means the first quarter of our fiscal year 2018.  We are currently reviewing the ASU and evaluating the potential impact on our financial statements.

We are a smaller reporting company and are not required to provide this information.

The information required by this Item 8 begins at page 23.

None

An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of February 29, 2016.  This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and our Controller/Corporate Secretary (Principal Financial and Accounting Officer).

Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported in accordance within the time periods specified in Securities and Exchange Commission rules and forms.  It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events.

During the fourth fiscal quarter of the fiscal year covered by this report on Form 10-K, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (the “Exchange Act”).  Under the supervision and with the participation of our management, including our President and our Controller, we evaluated the effectiveness of our internal control over financial reporting based on the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Based on our evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of February 29, 2016.  The original framework was updated with the issuance of the 2013 Internal Control – Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has not yet implemented the 2013 Framework, but does not deem it impacting our effective assessment conclusion.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

None

The information required by this Item 10 is furnished by incorporation by reference to the information under the caption “Election of Directors” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 19, 2016.

Information regarding our executive officers required by Item 401 of Regulation S-K is presented in Item 1 hereof under the subcaption “Executive Officers” as permitted by General Instruction G (3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.

The information required by this Item 10 is furnished by incorporation by reference to the information under the caption “Section 16 (a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 19, 2016.

The information required by this Item 11 is furnished by incorporation by reference to the information under the caption “Executive Compensation” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 19, 2016.

The information required by this Item 12 is furnished by incorporation by reference to the information under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Compensation Plans” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 19, 2016.

None

The information required by this Item 14 is furnished by incorporation by reference to the information under the caption “Independent Registered Public Accountants” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 19, 2016.

1.	Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	21
Balance Sheets as of February 29, 2016 and February 28, 2015	22
Statements of Earnings for the Years ended February 29, 2016 and February 28, 2015	23
Statements of Shareholders’ Equity for the Years ended February 29, 2016 and February 28, 2015	24
Statements of Cash Flows for the Years ended February 29, 2016 and February 28, 2015	25
Notes to Financial Statements	26-35

Schedules have been omitted as such information is either not required or is included in the financial statements.

3.1	Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No. 0-4957).
3.2	Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957).
3.3	By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957).
3.4	Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-4957).
3.5	Certificate of Amendment of Restated Certificate of Incorporation dated March 22, 1996 is incorporated herein by reference to Exhibit 3.4 to Form 10-K for fiscal year ended February 28, 1997 (File No. 0-4957).
3.6	Certificate of Amendment of Restated Certificate of Incorporation dated July 15, 2002 is incorporated herein by reference to Exhibit 10.30 to Form 10-K dated February 28, 2003 (File No. 0-4957).
4.1	Specimens of Common Stock Certificates are incorporated herein by reference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K (File No. 0-4957) filed June 29, 1970.
10.1	Usborne Agreement-Contractual agreement by and between the Company and Usborne Publishing Limited dated November 25, 1988 is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1989 (File No. 0-4957).

10.2	Party Plan-Contractual agreement by and between the Company and Usborne Publishing Limited dated March 14, 1989 is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 28, 1989 (File No. 0-4957).
10.3	Amendment dated January 1, 1992 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0-4957).
10.4	Educational Development Corporation 1992 Incentive Stock Option Plan is incorporated herein by reference to Exhibit 4(c) to Registration Statement on Form S-8 (File No. 33-60188).
10.5	Restated Loan Agreement dated June 30, 1999 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 29, 2000 (File No. 0-4957).
10.6	Educational Development Corporation 2002 Incentive Stock Option Plan is incorporated herein by reference to Exhibit A to definitive proxy statement on Schedule 14A dated May 23, 2002 (File No. 0-4957).
10.7	Amendment dated November 12, 2002 to Usborne Agreement – Contractual agreement by and between us and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 28, 2003 (File No. 0-4957).
10.8	Employment Agreement between Randall W. White and the Company dated February 28, 2004.
10.9	Eleventh Amendment dated June 30, 2009 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.10	Twelfth Amendment dated June 30, 2010 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.11	Thirteenth Amendment dated June 30, 2011 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.12	Fourteenth Amendment dated June 30, 2012 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.13	Fifteenth Amendment dated June 30, 2013 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.14	Sixteenth Amendment dated June 30, 2014 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.15	Seventeenth Amendment dated September 19, 2014 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.16	Eighteenth Amendment dated June 30, 2015 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.17	Nineteenth Amendment dated July 7, 2015 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.18	Loan Agreement dated December 1, 2015 by and between the Company and MidFirst Bank, Tulsa, OK.

10.19	Purchase and Sale Agreement dated October 1, 2015 by and between the Company and Hilti, Inc., Tulsa, OK.
10.20	Lease Agreement dated December 1, 2015 by and between the Company and Hilti, Inc., Tulsa, OK.
10.21	First Amendment Loan Agreement dated March 10, 2016 by and between the Company and MidFirst Bank, Tulsa, OK.
*23.1	Consent of Independent Registered Public Accounting Firm.
*31.1	Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2	Certification of the Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1	Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Filed Herewith

 

Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EDUCATIONAL DEVELOPMENT CORPORATION

Marilyn Pinney

Controller and Corporate Secretary

(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Date:	May 26, 2016		/s/ Randall W. White
			Randall W. White
			Chairman of the Board
			President, Treasurer and
			Director
	May 26, 2016		/s/ John A. Clerico
			John A. Clerico, Director
	May 26, 2016		/s/ Ronald McDaniel
			Ronald McDaniel, Director
	May 26, 2016		/s/ Kara Gae Neal
			Kara Gae Neal, Director
	May 26, 2016		/s/ Betsy Rickert
			Betsy Rickert, Director
	May 26, 2016		/s/ Marilyn Pinney
			Marilyn Pinney
			Controller and Corporate Secretary
			(Principal Financial and Accounting Officer)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Educational Development Corporation

We have audited the accompanying balance sheets of Educational Development Corporation as of February 29, 2016 and February 28, 2015, and the related statements of earnings, shareholders’ equity and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Educational Development Corporation as of February 29, 2016 and February 28, 2015, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ HOGANTAYLOR LLP

Tulsa, Oklahoma

May 26, 2016

EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
AS OF FEBRUARY 29(28),
ASSETS		2016				2015
CURRENT ASSETS:
Cash and cash equivalents		$	1,183,700			$	383,900
Accounts receivable, less allowance for doubtful accounts and     sales returns $501,900 (2016) and $334,500 (2015)			2,513,300				3,076,700
Inventories—Net			17,479,500				11,181,000
Prepaid expenses and other assets			1,028,100				374,200
Deferred income taxes			298,200				249,800
Total current assets			22,502,800				15,265,600
INVENTORIES—Net			169,000				350,800
PROPERTY, PLANT AND EQUIPMENT—Net			26,710,300				2,073,200
OTHER ASSETS			262,000				243,400
DEFERRED INCOME TAXES			50,900				80,200
TOTAL ASSETS		$	49,695,000			$	18,013,200
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	7,801,300			$	2,237,700
Line of credit			3,331,800				1,400,000
Deferred revenues			2,925,200				-
Current maturities of long-term debt			615,400				-
Accrued salaries and commissions			1,202,500				618,100
Income taxes payable			803,100				63,600
Dividends payable			366,300				322,000
Other current liabilities			1,732,500				1,043,500
Total current liabilities			18,778,100				5,684,900
LONG-TERM DEBT—Net of current maturities			17,687,400				-
Total liabilities			36,465,500				5,684,900
COMMITMENTS (Note 7)
SHAREHOLDERS’ EQUITY:
Common stock, $0.20 par value; Authorized 8,000,000 shares;     Issued 6,041,040 shares; Outstanding 4,064,610 (2016) and         4,024,539 (2015) shares			1,208,200				1,208,200
Capital in excess of par value			8,548,000				8,548,000
Retained earnings			14,557,500				13,857,200
			24,313,700				23,613,400
Less treasury stock, at cost			(11,084,200	)			(11,285,100	)
Total shareholders’ equity			13,229,500				12,328,300
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	49,695,000			$	18,013,200

See notes to financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED FEBRUARY 29(28),
		2016				2015
GROSS SALES		$	80,319,400			$	48,345,400
Less discounts and allowances			(22,061,500	)			(17,273,100	)
Transportation revenue			5,360,400				1,476,000
NET REVENUES			63,618,300				32,548,300
COST OF SALES			20,494,200				12,763,900
Gross margin			43,124,100				19,784,400
OPERATING EXPENSES:
Operating and selling			19,419,400				9,515,400
Sales commissions			18,062,800				6,842,700
General and administrative			2,328,500				2,039,900
Total operating expenses			39,810,700				18,398,000
INTEREST EXPENSE			244,900				54,000
OTHER INCOME			(477,400	)			(70,100	)
EARNINGS BEFORE INCOME TAXES			3,545,900				1,402,500
INCOME TAXES			1,426,600				543,300
NET EARNINGS		$	2,119,300			$	859,200
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic		$	0.52			$	0.21
Diluted		$	0.52			$	0.21
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:
Basic			4,049,154				4,003,702
Diluted			4,051,678				4,003,702
Dividends per share		$	0.35			$	0.32

See notes to financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED FEBRUARY 29(28),
		Common Stock
		(par value $0.20 per share)
		Number of								Capital in								Treasury Stock
		Shares								Excess of				Retained				Number of								Shareholders’
		Issued				Amount				Par Value				Earnings				Shares				Amount				Equity
BALANCE—March 1, 2014			6,041,040			$	1,208,200			$	8,548,000			$	14,280,500				2,063,097			$	(11,454,300	)		$	12,582,400
Purchases of treasury stock			-				-				-				-				1,339				(5,200	)			(5,200	)
Sales of treasury stock			-				-				-				-				(47,935	)			174,400				174,400
Dividends declared ($0.08/share)			-				-				-				(322,000	)			-				-				(322,000	)
Dividends paid ($0.24/share)			-				-				-				(960,500	)			-				-				(960,500	)
Net earnings			-				-				-				859,200				-				-				859,200
BALANCE—February 28, 2015			6,041,040			$	1,208,200			$	8,548,000			$	13,857,200				2,016,501			$	(11,285,100	)		$	12,328,300
Purchases of treasury stock			-				-				-				-				163				(1,600	)			(1,600	)
Sales of treasury stock			-				-				-				-				(40,234	)			202,500				202,500
Dividends declared ($0.09/share)			-				-				-				(366,300	)			-				-				(366,300	)
Dividends paid ($0.26/share)			-				-				-				(1,052,700	)			-				-				(1,052,700	)
Net earnings			-				-				-				2,119,300				-				-				2,119,300
BALANCE—February 29, 2016			6,041,040			$	1,208,200			$	8,548,000			$	14,557,500				1,976,430			$	(11,084,200	)		$	13,229,500

See notes to financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 29(28),
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	2,119,300			$	859,200
Adjustments to reconcile net earnings to net cash     provided by (used in) operating activities:
Depreciation			274,500				129,400
Deferred income taxes			(19,100	)			700
Provision for doubtful accounts and sales returns			1,239,600				1,281,000
Provision for inventory valuation allowance			(68,100	)			-
Changes in assets and liabilities:
Accounts receivable			(676,200	)			(1,356,900	)
Inventories, net			(6,048,600	)			(1,192,200	)
Prepaid expenses and other assets			(672,500	)			(88,000	)
Accounts payable, accrued salaries and commissions,         and other current liabilities			6,837,000				182,500
Deferred revenue			2,925,200				-
Income tax payable			739,500				(77,300	)
Total adjustments			4,531,300				(1,120,800	)
Net cash provided by (used in) operating activities			6,650,600				(261,600	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment			(24,911,600	)			(325,000	)
Net cash used in investing activities			(24,911,600	)			(325,000	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments—long-term debt			(97,200	)			-
Proceeds from long-term debt			18,400,000				-
Cash received from sale of treasury stock			202,500				174,400
Cash paid to acquire treasury stock			(1,600	)			(5,200	)
Borrowings under line of credit			4,881,800				4,550,000
Payments under line of credit			(2,950,000	)			(3,150,000	)
Dividends paid			(1,374,700	)			(1,278,700	)
Net cash provided by financing activities			19,060,800				290,500
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			799,800				(296,100	)
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR			383,900				680,000
CASH AND CASH EQUIVALENTS—END OF YEAR		$	1,183,700			$	383,900
SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:
Cash paid for interest		$	179,800			$	54,000
Cash paid for income taxes		$	706,400			$	619,900

See notes to financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION

NOTES TO FINANCIAL STATEMENTS

YEARS ENDED FEBRUARY 29, 2016 AND FEBRUARY 28, 2015

---

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business—Educational Development Corporation (“we”, “our”, “us”, or “the Company”) distributes books and publications through our EDC Publishing and Usborne Books & More (“UBAM”) divisions to book, toy and gift stores, libraries and home educators located throughout the United States (“U.S.”).  We are the sole U.S. distributor of books and related items, which are published by an England-based publishing company, Usborne, our primary supplier.  We are also in the direct publishing market through our ownership of Kane Miller Book Publishers.

Estimates—Our financial statements were prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements.  Actual results could differ from these estimates.

Business Concentration—A significant portion of our inventory purchases are concentrated with Usborne.  Purchases from them were approximately $20.0 million and $12.2 million for the years ended February 29, 2016 and February 28, 2015, respectively.  Total inventory purchases for those same periods were approximately $29.8 million and $15.3 million, respectively.

Cash and Cash Equivalents—Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits.  We have never experienced any losses related to these balances.  Insurance coverage on our cash balances was limited to $250,000 and our cash balances exceed federally insured limits.  The majority of payments due from banks for third party credit card transactions process within two business days.  These amounts due are classified as cash and cash equivalents.  Cash and cash equivalents also include demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired.

Accounts Receivable— Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date.  Extended, seasonal dating is frequently available for orders of minimum quantities or amounts.  Trade accounts are stated at the amount management expects to collect from outstanding balances.  Delinquency fees are not assessed.  Payments of accounts receivable are allocated to the specific invoices identified on the customers’ remittance advice.  Accounts receivable are carried at original invoice amount less an estimated reserve made for returns and discounts based on quarterly review of historical rates of returns and expected discounts to be taken.  The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the amounts that will not be collected.

 

 Management periodically reviews accounts receivable balances and, based on an assessment of historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends, estimates the portion of the balance that will not be collected.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation account based on its assessment of the current status of the individual accounts.  Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.  Recoveries of trade receivables previously written off are recorded as income when received.

Property, Plant and Equipment—Property, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, as follows:

Building	30 years
Building improvements	10 – 15 years
Machinery, equipment	3 – 15 years
Furniture and fixtures	3 years

Capitalized projects that are not placed in service are recorded as in progress and are not depreciated until the related assets are placed in service.

Income Taxes—We account for income taxes using the liability method.  Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using the current tax laws and rates.  A valuation allowance is established when necessary to reduce deferred tax assets to the amounts that are “more likely than not” to be realized.

Allowances for estimated sales returns are recorded as sales are recognized and recorded.  Management uses a moving average calculation to estimate the allowance for sales returns.  We are not responsible for product damaged in transit.  Damaged returns are primarily from the retail stores related to damages which occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Management has estimated and included a reserve for sales returns of $100,000 as of February 29, 2016 and February 28, 2015.

Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.

Shipping and Handling Costs—We classify shipping and handling costs as operating and selling expenses in the statements of earnings.  Shipping and handling costs were $8,655,600 and $3,719,300 for the years ended February 29, 2016 and February 28, 2015, respectively.

 

Earnings per Share—Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period.  Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options.  In computing Diluted EPS, we have utilized the treasury stock method.

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share (“EPS”) is shown below.

		Year Ended February 29(28),
		2016				2015
Earnings Per Share:
Net earnings applicable to common shareholders		$	2,119,300			$	859,200
Shares:
Weighted average shares outstanding–basic			4,049,154				4,003,702
Assumed exercise of options			2,524				-
Weighted average shares outstanding–diluted			4,051,678				4,003,702
Diluted Earnings Per Share
Basic		$	0.52			$	0.21
Diluted		$	0.52			$	0.21
Stock options not considered above because they were antidilutive			-				10,000

Long-Lived Asset Impairment— We review the value of long‑lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows.  No impairment was noted as a result of such review during the years ended February 29, 2016 and February 28, 2015.

Stock-Based Compensation—Share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the requisite service period, net of estimated forfeitures.

New Accounting Pronouncements— The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting.  We have reviewed the recently issued pronouncements and concluded that the following recently issued accounting standards apply to us.

In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” which provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures.  The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which means the first quarter of our fiscal year 2019.  We are currently reviewing the ASU and assessing the potential impact on our financial statements.

In August 2015, FASB issued ASU No. 2015-15 “Interest—Imputation of Interest,” which modifies the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements.  These changes allow an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.  The changes are effective for financial statements issued for annual periods beginning after December 15, 2015, and interim periods within those annual periods, which means the first quarter of our fiscal year 2017.  We are currently reviewing the ASU and assessing the potential impact on our financial statements.

In November 2015, FASB issued ASU No. 2015-17, which is intended to improve how deferred taxes are classified on organizations’ balance sheets by eliminating the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.  Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent.  The changes are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which means the first quarter of our fiscal year 2018.  We anticipate this ASU having minimal impact on our financial statements.

In February 2016, FASB issued ASU No. 2016-02, “Leases,” which is intended to establish a comprehensive new lease accounting model.  The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset.  The new standard is effective for interim and annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020.  The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements.  We are currently reviewing the ASU and evaluating the potential impact on our financial statements.

In March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The new standard is effective for interim and annual periods beginning after December 15, 2016, which means the first quarter of our fiscal year 2018.We are currently reviewing the ASU and evaluating the potential impact on our financial statements.

 

  Inventories consist of the following:

		February 29(28),
		2016				2015
Current:
Book inventory		$	17,504,500			$	11,206,000
Inventory valuation allowance			(25,000	)			(25,000	)
Inventories net–current		$	17,479,500			$	11,181,000

Noncurrent:
Book inventory		$	469,000			$	718,900
Inventory valuation allowance			(300,000	)			(368,100	)
Inventories net–noncurrent		$	169,000			$	350,800

3.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

		February 29(28),
		2016				2015
Land		$	4,107,200			$	250,000
Building			20,321,800				2,124,700
Building improvements			2,735,800				781,600
Machinery and equipment			2,190,300				1,706,400
Furniture and fixtures			85,700				75,700
System installations in progress			610,000				200,800
			30,050,800				5,139,200
Less accumulated depreciation			(3,340,500	)			(3,066,000	)
		$	26,710,300			$	2,073,200

Other current liabilities consist of the following:

		February 29(28),
		2016				2015
Accrued royalties		$	578,200			$	368,200
Accrued UBAM trip incentives			705,200				323,700
Interest payable			65,000				-
Sales tax payable			145,700				181,000
Other			238,400				170,600
		$	1,732,500			$	1,043,500

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The tax effects of significant items comprising our net deferred tax assets and liabilities as of February 29(28) are as follows:

		2016				2015
Current:
Deferred tax assets:
Allowance for doubtful accounts		$	40,000			$	41,100
Inventory overhead capitalization			131,000				86,900
Inventory valuation allowance			9,500				9,500
Allowance for sales returns			38,000				38,000
Accruals			79,700				74,300
Deferred tax assets-current			298,200				249,800
Noncurrent:
Deferred tax assets:
Inventory valuation allowance		$	114,000			$	143,300
Capital loss carryforward			163,600				163,600
Subtotal deferred tax assets			277,600				306,900
Less valuation allowance			(163,600	)			(163,600	)
Total net deferred tax assets			114,000				143,300
Deferred tax liabilities:
Property, plant and equipment			(63,100	)			(63,100	)
Deferred tax liabilities			(63,100	)			(63,100	)
Net deferred tax asset-noncurrent		$	50,900			$	80,200

Management has assessed the evidence to estimate whether sufficient future capital gains will be generated to utilize the existing capital loss carryforward.  As no current expectation of capital gains exists, Management has  determined that a valuation allowance is necessary to reduce the carrying value of deferred tax assets as it is “more likely than not” that such assets are unrealizable.

The amount of the deferred tax asset considered realizable, however, could be adjusted if future capital gains are generated during the carryforward period which ends February 28, 2019.  Management has determined that no valuation allowance is necessary to reduce the carrying value of other deferred tax assets as it is “more likely than not” that such assets are realizable.

 

The amount of the deferred tax liability related to property, plant and equipment could be adjusted if a scheduled future cost segregation analysis, expected to be completed by the end of the second fiscal quarter 2017, results in changes which affect this liability.

The components of income tax expense are as follows:

		February 29(28),
		2016				2015
Current:
Federal		$	1,210,900			$	439,200
State			234,800				103,400
			1,445,700				542,600
Deferred:
Federal			(16,100	)			600
State			(3,000	)			100
			(19,100	)			700
Total income tax expense		$	1,426,600			$	543,300

The following reconciles our expected income tax expense utilizing statutory tax rates to the actual tax expense:

		February 29(28),
		2016				2015
Tax expense at federal statutory rate		$	1,205,600			$	476,800
Federal income tax audit expense for 2012			67,900				-
State income tax–net of federal tax benefit			158,200				73,300
Other			(5,100	)			(6,800	)
Total income tax expense		$	1,426,600			$	543,300

We file our tax returns in the U.S. and certain state jurisdictions.  We are no longer subject to income tax examinations by tax authorities for fiscal years before 2013.

Based upon a review of our income tax filing positions, we believe that our positions would be sustained upon an audit and do not anticipate any adjustments that would result in a material change to our financial position.  Therefore, no reserves for uncertain income tax positions have been recorded.  We classify interest and penalties associated with income taxes as a component of income tax expense on the statement of earnings.

6.	EMPLOYEE BENEFIT PLAN

We have a profit sharing plan that incorporates the provisions of Section 401(k) of the Internal Revenue Code.  The 401(k) plan covers substantially all employees meeting specific age and length of service requirements.  Matching contributions are discretionary and amounted to $51,400 and $44,900 in the fiscal years ended February 29, 2016 and February 28, 2015, respectively.  The 401(k) plan includes an option for employees to invest in our stock, which is purchased from our treasury stock shares.  Shares purchased for the 401(k) plan from Treasury stock amounted to 40,121 net shares and 47,935 net shares in the fiscal years ended February 29, 2016 and February 28, 2015, respectively.

 

7.       COMMITMENTS

 

In connection with the purchase of the facility, disclosed in Note 3, we entered into a 15-year lease with the seller, a non-related third party, who will lease 181,300 square feet, or 45.3% of the facility.  The lease is being accounted for as an operating lease.

The cost of the leased space upon acquisition was estimated as $10,159,000, which was also the carrying cost as of February 29, 2016.  The accumulated depreciation associated with the leased assets as of February 29, 2016, was $88,000.  Both the leased assets and accumulated depreciation are included in property, plant and equipment-net classification in the balance sheet.

 

The lessee will pay $105,800 per month, with a 2.0% annual increase adjustment on the anniversary of the lease.  The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term.  Revenue associated with the lease is being recorded on a straight-line basis and is reported in Other Income on the statement of earnings.

 

The following table reflects future minimum rental income payments under the non-cancellable portion of this lease as of February 29, 2016:

Year ending February 28(29),
2017		$	1,275,400
2018			1,301,000
2019			1,327,000
2020			1,353,500
2021			1,380,600
Thereafter			14,992,400
Total		$	21,629,900

At February 29, 2016, we had outstanding purchase commitments for inventory totaling approximately $18,143,200, which is due during fiscal year 2017.  Of these commitments, $14,370,300 were with Usborne, $3,550,000 with various Kane Miller publishers and the remaining $223,000 with other suppliers.

 

  Debt consists of the following:

		February 29(28),
		2016				2015
Line of credit		$	3,331,800			$	1,400,000
Long-term debt		$	18,302,800			$	-
Less current maturities			(615,400	)			-
Total		$	17,687,400			$	-

  In connection with our purchase of the new facility, disclosed in Note 3, and effective December 1, 2015, we signed a Loan Agreement with MidFirst Bank (the Bank) including a Term Loan comprised of Tranche A of $13.4 million and Tranche B of $5.0 million both with the maturity date of December 1, 2025.  The Loan Agreement also provides a $4.0 million revolving loan (“line of credit”) through December 1, 2016. Available credit under the line of credit agreement was $668,200 as of February 29, 2016.  Tranche A has a fixed interest rate of 4.23% and interest is payable monthly.  For Tranche B and the line of credit, interest is payable monthly at the lesser of the maximum interest rate permitted under the Governing law, or the bank adjusted LIBOR Index plus 2.75% (3.18% at February 29, 2016). Subsequent to year end, we executed the First amendment to the loan agreement in March 2016, which increased the line of credit to $6.0 million.

 

The Loan Agreement also contains a provision for our use of the Bank’s letters of credit.  The Bank agrees to issue, or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than December 1, 2016, and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.  The Loan Agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions.  For the year ended February 29, 2016, we had no letters of credit outstanding.

 

Effective November 18, 2015, we paid off and terminated our previous Credit and Security Agreement with Arvest Bank which provided a $4.0 million line of credit.  We had $1.4 million in borrowings outstanding on the line of credit at February 28, 2015.

 

The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:

Year ending February 28(29),
2017		$	615,400
2018			641,800
2019			667,300
2020			693,800
2021			719,700
Thereafter			14,964,800
		$	18,302,800

9.	CAPITAL STOCK, STOCK OPTIONS AND WARRANTS

The Board of Directors adopted the 2002 Incentive Stock Option Plan (the “2002 Plan”) in June of 2002.  The 2002 Plan also authorized us to grant up to 1,000,000 stock options.

Options granted under the 2002 Plan vest at date of grant and are exercisable up to ten years from the date of grant.  The exercise price on options granted is equal to the market price at the date of grant.  Options outstanding at February 29, 2016 expire in December 2019.

A summary of the status of our 2002 Plan as of February 29, 2016 and February 28, 2015, and changes during the years then ended is presented below:

		February 29(28),
		2016								2015
						Weighted								Weighted
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
Outstanding at   Beginning of Year			10,000			$	5.25				11,000			$	5.68
Exercised			-				-				-				-
Expired			-				-				(1,000	)			(10.00	)
Outstanding at End of Year			10,000				5.25				10,000				5.25

The following is a summary of the quarterly results of operations for the years ended February 29, 2016 and February 28, 2015.

														Basic				Diluted
		Net												Earnings				Earnings
		Revenues				Gross Margin				Net Earnings				Per Share				Per Share
2016
First quarter		$	9,637,800			$	6,064,000			$	324,600			$	0.08			$	0.08
Second quarter			12,606,800				8,029,400				644,400				0.16				0.16
Third quarter			24,424,200				17,038,000				1,258,500				0.31				0.31
Fourth quarter			16,949,500				11,992,700				(108,200	)			(0.03	)			(0.03	)
Total year		$	63,618,300			$	43,124,100			$	2,119,300			$	0.52			$	0.52
2015
First quarter		$	7,178,300			$	4,334,800			$	239,700			$	0.06			$	0.06
Second quarter			6,808,200				3,795,100				(3,900	)			(0.00	)			(0.00	)
Third quarter			10,936,500				6,821,700				526,400				0.13				0.13
Fourth quarter			7,625,300				4,832,800				97,000				0.02				0.02
Total year		$	32,548,300			$	19,784,400			$	859,200			$	0.21			$	0.21

11.	BUSINESS SEGMENTS

We have two reportable segments: EDC Publishing and Usborne Books & More (“UBAM”) which are business units that offer different methods of distribution to different types of customers.  They are managed separately based on the fundamental differences in their operations.

·	EDC Publishing markets its products to retail accounts, which include book, toy and gift stores, school supply stores and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group.

·	UBAM markets its product line through a nationwide network of independent sales consultants using a combination of home shows, internet shows, and book fairs.  The UBAM division also distributes to school and public libraries.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses.  Corporate expenses, depreciation, interest expense, other income and income taxes are not allocated to the segments, but are listed in the “other” column.  Corporate expenses include the executive department, accounting department, information services department, general office management and building facilities management.  Our assets and liabilities are not allocated on a segment basis.

Information by industry segment for the years ended February 29, 2016 and February 28, 2015 is set forth below:

NET REVENUES
		2016				2015
Publishing		$	10,831,400			$	11,532,500
UBAM			52,786,900				21,015,800
Other			-				-
Total		$	63,618,300			$	32,548,300